Which buying mechanism allows investors to leverage their investments through borrowed funds?

Which buying mechanism allows investors to leverage their investments through borrowed funds?

• A. Margin account
• B. Limit order
• C. Shelf-registration
• D. Callable preferred shares

Answer: (A)

A margin account is a specific type of brokerage account that facilitates the borrowing of funds to purchase securities, thereby enabling investors to leverage their investments. When investors use a margin account, they can borrow money from their brokerage to increase their purchasing power, allowing them to buy more shares than they could with their own cash alone. The primary appeal of this mechanism is the possibility of amplifying returns; for example, if the value of the purchased securities rises, the investor can potentially realize a higher profit than they would have without the leverage. However, it is important to note that leveraging investments comes with increased risk, as losses can also be amplified if the value of the securities falls. In contrast, a limit order is an instruction to buy or sell a security at a specified price or better, but it does not involve borrowing funds. Shelf-registration refers to a regulatory process that allows companies to register multiple offerings of stock or bonds over a period without having to register each individual offering, thus not related to leveraging. Callable preferred shares offer the company the right to buy back shares from investors at a set price, but again, they do not involve leveraging investments through borrowed funds.

A margin account is a specific type of brokerage account that facilitates the borrowing of funds to purchase securities, thereby enabling investors to leverage their investments. When investors use a margin account, they can borrow money from their brokerage to increase their purchasing power, allowing them to buy more shares than they could with their own cash alone.

The primary appeal of this mechanism is the possibility of amplifying returns; for example, if the value of the purchased securities rises, the investor can potentially realize a higher profit than they would have without the leverage. However, it is important to note that leveraging investments comes with increased risk, as losses can also be amplified if the value of the securities falls.

In contrast, a limit order is an instruction to buy or sell a security at a specified price or better, but it does not involve borrowing funds. Shelf-registration refers to a regulatory process that allows companies to register multiple offerings of stock or bonds over a period without having to register each individual offering, thus not related to leveraging. Callable preferred shares offer the company the right to buy back shares from investors at a set price, but again, they do not involve leveraging investments through borrowed funds.